Choosing Between LLC and S-Corporation Status: Liability and Tax Implications
Aug. 25, 2025
Starting a business involves more than offering a great product or service—it also means selecting the legal structure that supports your goals. For many entrepreneurs, the choice comes down to forming a Limited Liability Company (LLC) or electing S-Corporation (S-Corp) status.
At Rossi & DeMarco, PLLC, we help new and existing businesses across Tonawanda, New York weigh their options with clarity and confidence. Our business counseling and formation attorneys provide tailored guidance based on your needs, future plans, and industry. Let’s explore the key differences between LLCs and S-Corporations.
Limited Liability Basics: What Both Structures Offer
LLCs and S-Corps both provide limited liability protection, which helps shield business owners’ personal assets—such as homes, cars, and personal savings—from company debts and legal claims. This protection means that, in most cases, owners aren’t personally responsible for the business’s financial obligations or lawsuits.
Plaintiffs are typically limited to pursuing the business’s assets rather than targeting individual owners. Beyond legal protection, forming an LLC or S-Corp can also boost your company’s credibility by presenting a more professional image to clients and investors.
While both structures share these protections, they differ in how they manage ownership roles and operational control, which can affect your exposure over time. Working with business counseling and formation attorneys can help you evaluate which structure aligns with your risk comfort and plans for future growth.
Key Differences in Ownership and Management
How a business is owned and run will look quite different depending on whether it’s an LLC or an S-Corp. These differences may affect how you raise capital, distribute profits, and manage the daily operations of your business.
Key differences between LLCs and S-Corps in ownership and management include:
Ownership flexibility: LLCs can have unlimited members, including individuals, corporations, and even foreign entities. S-Corps are limited to 100 shareholders, all of whom must be U.S. citizens or residents.
Types of stock: S-Corps can issue only one class of stock, which limits the ownership structure. LLCs offer more flexibility with profit distribution.
Management structure: LLCs can be managed by members (owners) or by appointed managers. S-Corps require a board of directors, corporate officers, and formal shareholder meetings.
Transfer of ownership: S-Corp shares can be transferred without disrupting business operations, but LLCs often require approval from all members to add or remove owners.
If you value flexibility and minimal structure, an LLC may be more attractive. If you're preparing for rapid growth or investment opportunities, an S-Corp may better suit your long-term plans. Business counseling and formation attorneys can guide you through these differences as they apply to your specific situation.
Tax Implications: How Each Structure Affects Your Bottom Line
One of the most significant distinctions between an LLC and an S-Corp is how each is treated for federal tax purposes. These differences can directly affect how much you owe and how you pay taxes each year.
Tax features of LLCs and S-Corps include:
Pass-through taxation: Both structures avoid double taxation by passing profits and losses directly to the owners’ personal tax returns.
Self-employment tax: LLC members typically pay self-employment taxes (Social Security and Medicare) on all business income. In contrast, S-Corp owners who are also employees pay self-employment tax only on their salaries, not on the company’s remaining profits.
Reasonable salary requirement for S-Corps: S-Corp owners must pay themselves a reasonable salary for work performed, which is subject to employment taxes.
Flexibility in taxation for LLCs: LLCs can choose to be taxed as a sole proprietorship, partnership, C-Corp, or S-Corp, depending on what works for you.
The S-Corp structure may offer substantial savings on self-employment taxes, but it also comes with more IRS scrutiny and paperwork. Business counseling and formation attorneys can help you model different tax scenarios and make the choice that maximizes your after-tax income.
Administrative Burdens and Formalities
When deciding between an LLC and an S-Corp, you’ll want to think about how much administrative responsibility you’re willing to handle. S-Corps typically involve more documentation and require adherence to stricter formalities, while LLCs are generally more relaxed and easier to manage.
For instance, S-Corps must hold annual meetings, keep minutes, and operate under corporate bylaws, whereas LLCs aren’t bound by these formalities. In terms of tax reporting, S-Corps need to file IRS Form 1120S and provide K-1s to each shareholder, while LLCs often report income directly through the owners’ personal tax returns unless a different election is made.
Additionally, S-Corp owners who actively work in the business must process payroll and submit employment tax filings. Both LLCs and S-Corps must still meet New York’s state filing and compliance rules. If you’d rather focus on your business than paperwork, an LLC might be the simpler route.
However, if potential tax savings justify the extra effort, an S-Corp may be the better choice. A business counseling and formation attorney can help assess your time, goals, and structure preferences.
Flexibility in Profit Distribution
One area where LLCs really shine is in how profits and losses are allocated. Unlike S-Corps, LLCs allow members to divide profits in ways that don’t strictly match ownership percentages.
How profit distribution differs between LLCs and S-Corps:
LLCs offer custom allocations: Members can agree to divide profits based on contributions, roles, or other terms outlined in an operating agreement.
S-Corps require equal distributions: Profits must be distributed according to each shareholder's percentage of ownership, since there's only one class of stock.
Tax impact of distributions: LLC members pay self-employment tax on distributed profits, while S-Corp shareholders may receive distributions that aren't subject to self-employment taxes.
This flexibility can be helpful in businesses where some members contribute more time or capital than others. However, the simplicity and predictability of S-Corp distributions may appeal to startups with more uniform ownership. Business counseling and formation attorneys can help you structure a plan that suits your internal dynamics.
Choosing Based on Business Goals
The structure for your business depends on your specific goals, the nature of your industry, and how much you expect to grow. There’s no universal answer, which is why getting professional legal and financial advice is so valuable. For example, solo entrepreneurs or family-run businesses often benefit from the simplicity and flexibility of an LLC.
On the other hand, startups looking for outside investment may prefer an S-Corp, as it can appeal more to investors who value formal structure and reporting. If your business is likely to generate high profits, an S-Corp could offer savings on self-employment taxes.
For companies with multiple owners who play different roles, an LLC may be a better fit due to its flexibility in structuring ownership and profit distribution. If you’re still weighing your options, speaking with business counseling and formation attorneys can help you choose a structure that supports your current operations and future goals.
How to Convert Between Structures
Sometimes, businesses start out with one structure and later decide that another is more suitable. The good news is that converting from an LLC to an S-Corp—or vice versa—is often possible with the right legal steps.
Important points about converting your business structure:
LLC to S-Corp: An LLC can elect S-Corp tax treatment by filing IRS Form 2553, provided it meets the eligibility criteria.
S-Corp to LLC: Converting back to an LLC may involve dissolving the corporation and forming a new LLC under state law, with careful tax planning to avoid triggering unnecessary gains or liabilities.
Legal and tax implications: Conversions can have tax consequences and may require updates to operating agreements, ownership documents, and payroll systems.
Switching structures is a major legal and financial decision. Working with experienced business counseling and formation attorneys can help you make the transition smoothly and avoid costly errors.
Contact Rossi & DeMarco, PLLC Today
Choosing between LLC and S-Corporation status is a critical step in shaping your business’s future. If you're ready to take the next step, the business counseling and formation attorneys at Rossi & DeMarco, PLLC, are here to help. We proudly assist clients in Amherst, Wheatfield, and throughout Erie County and Niagara County. Reach out to us today.